Business Context and Reporting Period
Company: American Superconductor Corporation (AMSC)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009 (First Quarter of Fiscal Year 2010)
Business Overview: AMSC operates in two segments: AMSC Power Systems (wind turbine electrical systems, grid reliability products) and AMSC Superconductors (HTS wire, power cables, fault current limiters). The company provides technologies for the electric power infrastructure, focusing on renewable energy integration and Smart Grid solutions.
Key Financial Metrics
| Metric (in thousands) | Q1 2010 (Ended June 30, 2009) | Q1 2009 (Ended June 30, 2008) |
|---|---|---|
| Total Revenues | $73,000 | $39,817 |
| Cost of Revenues | $50,417 | $28,196 |
| Gross Margin | 30.9% | 29.2% |
| Operating Income | $6,391 | $(2,688) |
| Net Income | $1,792 | $(6,103) |
| Diluted EPS | $0.04 | $(0.14) |
| Cash & Equivalents | $66,783 | $69,570 |
| Total Cash, Securities & Restricted Cash | $103,184 | $117,207 |
| Net Cash Used in Operating Activities | $(14,136) | $3,183 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 83% year-over-year, driven primarily by a 97% increase in the AMSC Power Systems segment ($70.7M vs $35.9M). This was due to higher sales of wind turbine electrical systems and core components, particularly to Sinovel Wind Co., Ltd. in China.
- Profitability Turnaround: The company reported a net income of $1.8M compared to a net loss of $6.1M in the prior year. Operating income improved from a loss of $2.7M to a profit of $6.4M.
- Segment Performance: While Power Systems generated $15.4M in operating income, the Superconductors segment reported an operating loss of $5.5M, slightly wider than the prior year's $5.1M loss, due to lower project revenues.
- Cash Flow: Operating cash flow turned negative ($14.1M used) compared to positive ($3.2M provided) in the prior year. This was primarily due to a $20.2M increase in cash used for working capital to support higher shipment volumes.
- Accounting Correction: Management corrected an immaterial error from the prior fiscal year regarding bonus expense, which increased net income by $0.3M in the current quarter.
Guidance, Outlook, and Risks
- Contract Expansion: On July 29, 2009, AMSC announced an amendment to its contract with Sinovel Wind Co., Ltd., increasing the contract value by approximately $20 million to over $470 million and accelerating delivery schedules.
- Liquidity: Management believes available cash ($103.2M total liquid assets) is sufficient to fund operations for at least the next 12 months. The company holds an unused line of credit of approximately $0.7M.
- Capital Expenditures: Approximately $15.8M has been invested in the 344 superconductors production line. An additional $28M to $35M is estimated to be required for full commercial manufacturing capacity.
- Risks:
- Customer Concentration: Sales to Sinovel represented 53% of total revenues for the quarter. Sales to ACCIONA and National Grid accounted for 14% and 10%, respectively.
- Foreign Currency: Significant exposure to Euro and Renminbi fluctuations. Foreign currency transaction and translation losses were $1.7M for the quarter.
- Project Delays: Revenue in the Superconductors segment was impacted by delays in the HYDRA project and delayed funding for the DOE-FCL project.
Investor Verification Checklist
- Sinovel Contract Terms: Verify the specific delivery milestones and payment terms associated with the $20M contract amendment announced in July 2009.
- Working Capital Trends: Monitor accounts receivable aging and collection rates given the significant cash outflow for working capital in Q1.
- Superconductors Segment Viability: Assess the timeline for revenue recognition on government-funded projects (HYDRA, LIPA, DOE-FCL) which are currently in prototype or development stages.
- Foreign Exchange Hedging: Review the effectiveness of currency hedging strategies given the $1.7M translation loss and reliance on foreign customers.
- Capital Requirements: Confirm the funding strategy for the estimated $28M-$35M additional capital expenditure required for full-scale HTS wire commercialization.